Saturday, 28 September 2013

Austerity, growth and being economical with the truth

OK, I know that those
more seasoned in trying to present simple economic ideas in a politicised
environment know this happens all the time. And damn it I knew it was going to
happen too, as I clearly predicted
in one of my early posts. But still, despite my attempts to mock,
the argument that positive growth proves critics of austerity wrong continues
to annoy me. So here is my attempt to say why it bothers me so much, but after
this post I really will try to move on.

Just in case you have not been convinced by my earlier posts
of just how ludicrous this argument is, think about this. US growth became
significantly positive at the end of 2009, and has remained so in nearly every
quarter since then. So if positive growth proves critics of austerity are
wrong, then the austerity debate in the US would be well and truly dead by
now. Those that refused to admit this
would be completely ignored. Yet the opposite
is true.

So the amazing thing is how the idea that the emergence of growth
after years of stagnation proves austerity was just fine could gain a moments
traction. Do not get me wrong. There are some arguments in favour of austerity
that should be seriously debated. But this is not one of them. Instead the argument
is just silly. So how can people get away with making it?

The first point to make is that although the argument is
obviously silly to anyone with a modicum of macroeconomic knowledge, to interested
people without that knowledge, but who get to listen to (or even interview)
people like George Osborne, it is not immediately obvious. It becomes pretty
obvious once it is explained (my example of deliberately shutting down part of
the economy was designed with that in mind), but you need to be exposed to
someone who can explain that. So, for those just interested in scoring
political points, there is a temptation to make the argument if they think they can get away with it.

However I do not think that excuses George
Osborne, or European politicians
who have done the same for the Eurozone. We may pretend to believe that all
politicians lie through their teeth all the time, but actually we do expect people
like the UK or German finance ministers to avoid talking economic nonsense. At
the very least we expect their civil servants to stop them saying things that
are nonsense. Well not this time.

But there are limits to what politicians can get away
with. The interesting question is what
those limits are, and what governs those limits.

Sometimes politicians can get away with bad arguments
because they are based on half truths. The example that comes to mind is the
idea that current austerity is required because of fiscal profligacy on the
part of the past Labour government. While that myth annoys me because (a) it is
used to support a damaging policy, and (b) because having crunched the
numbers I know it’s untrue, the existence of the myth does not surprise me
in the same way. As I have said before,
the half truth here is that Gordon Brown was a little imprudent by being
overoptimistic about tax receipts. Furthermore, if he had known in advance that
the global financial sector was going to blow up he would have been much more
cautious before that happened, so any data that is by
construction wise after the event will suggest he was not cautious enough. This
all means that for those who want to mislead there is the seed corn with which
to grow this myth.

Nothing like this is true for the ‘growth proves austerity
right’ idea. Instead it is an example of completely misrepresenting the
argument of your opponent. The overwhelming majority (maybe all) of the economists
who criticised austerity said that fiscal contraction would reduce the level of
output in the short run. They may also have been concerned that this short run
deflation might have negative longer term consequences. The deception is to morph
that into ‘critics of austerity said that the economy would never grow again as
long as austerity lasted’. Now I’m sure you could find some person (call them
X) who was foolish enough to say the economy would never grow while austerity
lasted. But everyone knows that Paul Krugman, or Brad DeLong, or Jonathan
Portes are not X. Yet those making the ‘growth proves austerity right’ argument
deliberately talk as if all critics of austerity were like X. It is a
deliberate deception. It must be particularly galling for Martin
Wolf to find his own newspaper
doing this to him.

Economists whose job involves communicating with others, and
media organisations that purport to have some economic expertise, have I
believe the equivalent of a duty of care. It is their job to make sure people
are not misled by arguments that they know are obviously wrong. What makes me cross
is seeing some who choose not to exercise this duty of care.

Let me use an analogy. You are a science reporter for a
newspaper, or even a reporter working for a magazine like the New Scientist or
Scientific American. You have to comment on a politician who claims that because
it snowed a lot this winter, climate change is clearly rubbish. What you would
do in those circumstances is patiently explain why the politician was talking
nonsense, discussing trends and noise and the like. You would not say as a prelude that
the politician ‘makes a serious case’. You would certainly not write a leader
in your paper saying the politician was absolutely right!

Just imagine it. A leader in the New Scientist or Scientific
American saying that politicians have won the climate change argument because of
recent heavy snow. So why is that idea inconceivable, but a leader
in the Financial Times saying that recent UK growth proves critics of austerity
are wrong goes without comment? It has nothing to do with economists being
divided about the wisdom of austerity: as I said, there are arguments on
austerity that should be debated, but this is not one of them. It cannot be
because austerity is so politicised, because climate change is also highly politicised.
It cannot be excused by saying that leaders are just opinions: you do not expect
opinions in serious newspapers to be based on deliberate misrepresentation. So
what is going on here? Would anyone from the FT care to comment?

36 comments:

They are professing to favour hopping over walking. I'm reminded of Dudley Moore - a unidexter - auditioning for the role of Tarzan. Peter Cook, the impresario, says: "Your right leg I like. I like your right leg. A lovely leg for the role. That's what I said when I saw you come in. I said ‘A lovely leg for the role.’ I've got nothing against your right leg. The trouble is — neither have you."

I can only think that the FT has gone from being a newspaper about economics to an in-house magazine for a City-Wall Street culture.

When Krugman wrote "the other day I found myself talking to a currency trader, who lamented the fact that all the experts had been wrong — they’d all predicted runaway inflation and a collapse of the dollar. The point was that even this guy believed that the people who have been consistently wrong about everything for decades are the “experts”; somehow they retain that reputation despite their record", this is the bubble in which they live.

I think George Osborne is a nice personification of that culture, and he shouldn't have changed his name: Gideon in the book of Judges went from being a farmer to executing rival kings, and then went back to his land. If you change 'rival kings' for peer reviewed economics, and 'land' for hereditarian wealth, there's your rather ugly parable.

I have seen a number of changes in the reporting of facts, particular economic facts, over he last 10 to 15 years or so. Shortly after 9/11 there was a lot of talk of critics of President George Bush being somehow "un-American". In the UK we had the war with the BBC over the Kelly affair. And now we have a Chairman of the BBC who has been almost a career Tory politician. On top of that you have the increasingly politicised journalist, much along the lines of the change from reporting the facts, to presenting the views of the two most extreme and opposite arguments on TV or the sole purpose of creating an argument. Long gone are the days when the BBC followed its Charter.

So when it comes to economics, those who believe in facts will always be beaten up by those for whom facts are less important than ideology. And the ideologists own the newspapers... and pay for the elections.

s for austerity reducing the size of the economy, you didn't need to be an economist to realise that, which is why people stopped spending money. Talk about talking the economy into a slump. that's what Cameron's political naivety produced. Once in power he didn't realise the game had changed, and he continued blaming Labour and undermining the LibDems while the economy suffered. Then, finally, they noticed, and changed. They should have made Vince Cable Chancellor. He's the only one in government qualified to run an economy!

I think you’ve underestimated the levels of ignorance in high places when you say in respect of European finance ministers that you’ expect their “civil servants to stop them saying things that are nonsense”.

To illustrate, it’s clear that numerous so called “economists” in the IMF and OECD just don’t get the point that for a monetarily sovereign country, the deficit and debt are one huge irrelevance: i.e. the only factor that limits stimulus is inflation.

It clearly is 'shrink the state' ideology over facts - pure salesmanship. In sales and politics any argument will do as long as it can fool enough people for long enough. Maybe the FT will now go the whole WSJ hog? If a large energy company were to buy and fund New Scientist and it went in the equivalent direction, say, re AGW, subscriptions would drop calamitously. There is no such constraint on the FT or WSJ

EmDrive was a hilarious bit of crackpottery, and the situation is/was nowhere near as serious as if NS had been bought by AGW pseudosceptic interests of course, but I thought at the time that the plight of the EmDrive investor Brian Milnes (revealed in the comment thread below Webb's editorial response) was a good illustration that these things do matter.

It seems to me the UK growth is based upon the housing bubble not bursting. This is the difference with European no growth countries like Spain or Netherlands. So how does the UK manage to keep the housing bubble going and is it sustainable?

Was Simon's post really necessary? Surely, it is no surprise that, when something positive happens, the ruling politicians ascribe it to their good work. As for the FT, they have journalists like Martin Wolf or Wolfgang Münchau who manage to be wrong so often that it is only poetic justice if one of them is contradicted by his own paper - that is the price of the latitude they have there to publish from their parallel universes.

Of course, the post becomes understandable when one bears in mind that Simon Wren-Lewis has, after promising beginnings, slowly but surely morphed into an Ersatz-Paul Krugman, recently including the Queen-of-Hearts side of his character. For one who was a hopeful reader of his blog since the beginning, life, alas, is full of disappointments.

Please can you provide a list of the wrong doings of the economists you mention? If only to provide some backing and validity to your comments - which appear base-less and incorrect given that the theories/models and analysis they have used and articulated these past few years have,as events have unfolded over time proved to be very accurate and largely correct.

I refer to the Queen of hearts in "Alice in Wonderland" - read it up, you will find many personages similar to Martin Wolf and his friends.

As for Anti-Austerians, you seem to overlook that they are the vast majority of commentators. They have proved to their own conviction that deficit spending should continue indefinitely (Paul Krugman: until full employment is reached -when does that happen on the basis of public spending? It didn't under the New Deal - it took a World War.)). And where are the governments to borrow all that money (if they had it, it wouldn't be deficit spending)? Well, if the markets won't lend, what are central banks for? And how are the governments going to repay it? Paul Krugman: 4 % inflation for 15 years will do the job, while robbing all savers. And then - how does one stop? Paul Krugman says in his textbook: "Inflation is easy, disinflation is hard". So how does one solve those problems? Of course, in the long run, we shall all be dead, or, as Madame Dubarry said, "après nous, le déluge" - let our children take care of that.

Oddly enough, there are people who think that, for countries who got themselves into a mess, reducing deficit spending is a necessary price (in Greece and Portugal) or at least a reasonable price (Italy, France or Spain) for future growth. Very odd, isn't it?

Since you require proof, I can refer you to Martin Wolf http://www.ft.com/intl/cms/s/0/b3faf9b0-2489-11e3-8905-00144feab7de.html#axzz2gU0EK8xL and the ensuing debate in the comments section.

It turns out that Martin Wolf, at least for the Euro zone, is a believer in a macroeconomic cargo cult: Germany only has to deliver the money it supposedly has (it doesn't) to solve all problems: it can reduce unemployment in Greece, Spain, Portugal, Ireland and Italy as well as those countries' drop in GDP. If you'll believe that, you'll believe anything.

As for Wolfgang Münchau, I am not aware of any skill in handling economic models. What he did manage was the German language edition of the Fionancial Times, and he managed to tank it: it had to close down. Now he's managing Eurointelligence ASBL - which you can of course trust, if you wish.

If those are the results of the theories/models and analysis they have used, something ought to be done about them.

Unfortunately your narrative is a complete mis-representation of Wolf's article and is no proof of MWs being 'wrong so often', when in fact what he stated was largely correct, even if you might disagree.As for Krugman, spend time carefully reading his articles beginning in perhaps 2009 on the NYT website, and you'll realise that his interpretations, explanations and predictions have been very accurate and proved mostly corrct as events have unfolded.

I am eager to learn, so please tell me where I got Martin Wolf wrong. In any case, he is all for continued deficit spending. On that subject, let me refer you to my remarks above Anonymous1 October 2013 06:28 Nick.

I have been following Paul Krugman for about 5 years and have learnt a lot. He is fun to read, but finally unconvincing, loc. cit.

Hi Hanno,You interpreted MW's article by commenting: "Germany only has to deliver the money it supposedly has (it doesn't) to solve all problems: it can reduce unemployment in Greece, Spain, Portugal, Ireland and Italy as well as those countries' drop in GDP."Nowhere in MWs article is this even alluded to. His words are: "What are those problems (Eurozone)? The first is to get out of the current mess. The second is to achieve the reforms needed in the longer run. *Ongoing fiscal transfers seem neither desirable nor feasible*.But better insurance mechanisms for sovereigns and banks are needed in the long run."So no mention of Germany delivering "the money it supposedly has (it doesn't) to solve all problems", as he makes clear (above).

HA: "he is all for continued deficit spending"... and "deficit spending should continue indefinitely". A complete misreprentation - who and where have they said *indefinitely*? And when UK and US governments can borrow at extremely low rates - then why not boost the economy using such a way in infrastructure and other capital investment programmes, rather than austerity which in theory and now proved in practice only depresses the economy further causing even higher unemployment and wider, long term problems. HA: "countries who got themselves into a mess, reducing deficit spending is a necessary price (in Greece and Portugal) or at least a reasonable price (Italy, France or Spain) for future growth. Very odd, isn't it?"I agree, it is very odd - because it isn't accurate. Yes, Greece and Portugal pre-crisis had quite large budget deficits ( 2000-07: average -5.4% and -3.7%), but Italy and France had budget deficits in the period of -2.9% and -2.7%, which is not far from Germany's -2.2% and hardly "getting themselves into a mess". As for Spain, it had a budget SURPLUS of 2% in 2007 (average 0.3% 2000-07)!Read this evidence based analysis to help clarify the true nature and causes of the eurocrisis: http://streetlightblog.blogspot.co.uk/2011/09/what-really-caused-eurozone-crisis-part.html because besides Greece, government budget deficits/debts and irresponsible spending was not even the cause of the eurocrisis.Lastly, reducing government deficits and debts are frequently no guarantee in practice of improved growth, as the following paper illustrates (see data p.24-25).http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

If you have been reading Paul Krugman for 5 years, like me you will have noticed that for the most part and certainly for the bigger economic picture, his predictions, explanations and analysis have, as time has passed and the crisis continued to unfold and worsen, with more and more data/statistics becoming available, shown him to be very frequently correct. So I'm not sure how Krugman turning out to be mostly correct is "unconvincing"?? Kind regards and apologies for the lengthy replySimon

I have been following Krugman's writings only for the past 2 months (hence my discover of Simon W-L's blog) after reading his most recent book 'End This Depression Now'. Although not an economist by profession or training, I have managed to understand the basic tenets of his view.

I would say that even in just that short period of time, I have enough evidence to find Krugman, Wren-Lewis' etc position utterly convincing because they fit with personal experience of everyday reality. They provide a new model by which to judge the doings of the politicos and big-business.

So far the model has maintained its internal consistency and is a useful guide to assess what I read about before I turn to the this blog and Krugman's.

Thank you for taking the trouble - a lengthy reply, if well-argued, is just what I wished for; after all, one of us has to learn, doesn’t he?

MW: "What are those problems (Eurozone)? The first is to get out of the current mess. The second is to achieve the reforms needed in the longer run. *Ongoing fiscal transfers seem neither desirable nor feasible*.But better insurance mechanisms for sovereigns and banks are needed in the long run."

No dispute about that, not even from Schaeuble; so why did MW put that in a violent attack on him? Clearly, MW thinks that he is doing something wrong.

You do not quote how MW continues: “Yet all this will be academic if the eurozone does not allow its members to return to economic health over a reasonable time period. Can that be done? Without a change in Germany’s philosophy, the answer is No.”

Now MW is a journalist on economic subjects. Such people do not believe in the power of ideas but of actions following from those ideas. What actions should Germany take according to MW? Do you really think they are different from what I said? It might be worthwhile reading more of his comments. I am very interested in what you will say.

The streetlightblog you refer to points out that the Euro was a bad idea from the beginning, and indeed it was. That is why Germans were against it. That they finally agreed was the result of blackmail by the socialist French President Mitterrand wo could have endangered German reunification. Those facts are uncontroversial; I refer you to Timothy Garton Ash,

The Herndon paper is of anecdotal interest in showing up incidental errors of Rogoff and Reinhart. It certainly does not show that governments can go on borrowing without limits - ask the Greek Minister of Finance.

What I find unconvincing in Paul Krugman are his recipes, which you do not discuss.

I'm afraid your argument is becoming even more incoherent, so I'll keep this brief:You said MW advocates Germany delivering money to solve all the problems - but nowhere does he say this. So rather than me - YOU tell me what he advocates Germany does using quotes.And again "deficit spending should continue indefinitely". A complete misreprentation - who and where have they said *indefinitely*?" Again you repeat this strawman attack in saying "It certainly does not show that governments can go on borrowing without limits". The Herndon paper illustrates the mistaken idea of yours that "reducing deficit spending is a necessary price (in Greece and Portugal) or at least a reasonable price (Italy, France or Spain) for future growth.",as the paper clearly shows that often (not always) countries with large debts and deficits experience high(er) growth than in years when the debts were smaller.The argument began with you saying why MW, Wren-Lewis and by implication Krugman are so often wrong, but you've turned it on its head by not explaining at all where exactly they are so wrong - only using weak, vague descriptors such as 'unconvincing', and instead asking me to explain Krugman's ideas and theories (recipes). YOU are the person saying they are wrong - so you can explain where and why, instead of diverting and evading the argument. I look forward to your reply....Kind regardsSimon

I must accept that we real MW differently. I read him in a context which you declare yourself unable to detect. My interpretation is clear, whereas you have a problem:

You will agree that his article is a violent, indeed venomous attack on Schaeuble as representative of German economic policy in the Euro Zone. MW gives a long list of the unemployment rates in the PIIGS countries before the crisis and now and of the drop in their GDPs. What is the point of that if he does not think either that Germany is the cause or that it can change that? If he didn’t think that he would only be spouting irrelevancies. Clearly, he wants Germany to do something different from what it is doing now. What ?

You know my interpretation, which is based on the assumption that MW thinks his readers know enough of his opinions to understand him. I should be happy to have misunderstood him. But what is your explanation of his meaning?

As for Paul Krugman, I had thought his opinions were common knowledge among the readers and commentators of this blog. You and Sine Labore Nihil3 October 2013 02:40 have proved me wrong. So let me refer you to

Unfortunately yet again your response is completely incoherent and again full of false suppositions, inaccuracies, and again you do not explain where and why MW or Paul Krugman are wrong, merely directing me to their articles.

You began these comments by saying they are wrong so often, and yet still have not explained why despite being asked on numerous occasions.

Neither have you expained to the host of this blog what his promising beginnings were and therefore by implication where/why his career has deteriororating.

For MW - Where did I declare myself unable to detect?

"You will agree that his article is a violent, indeed venomous attack on Schaeuble as representative of German economic policy in the Euro Zone."Is that a command? No, I don't agree it is...indeed the streetlightblog article at the start mentions his views and then clearly shows he is completely wrong - using those strange things called data and evidence to demonstarte why.MWs views on the action Germany should take needs to be clearly identified rather than guessed at and make a mistaken interpretation as you have done, then attack him based on a false interpretation! We know he does state 'no fiscal transfers', so that rules out your incomprehensible 'Germany sending them money' nonsense. No more strawmen arguments and attacks please Hanno.I am very familiar with Krugman, so again, rather than direct me to his articles, explain where.why he is mistaken! No need to tell me about the difficulties of internal devaluation and downward nominal wage rigidity etc either in his textbook. Using clear explanation supported by reliable evidnce and data, demonstrate where these economists are 'wrong so often'. No false assumptions, unsubstantiated opinions and no evidence free rhetoric again please. Ironically you have made no case yet...so it cannot be rested. I originally thought Anonymous1 October 2013 11:40 below was a little unkind to you, but it appears he knows you only too well!

"As I have said before, the half truth here is that Gordon Brown was a little imprudent by being overoptimistic about tax receipts."

If you are talking about being accurate about the system, why are you persisting with the economic myth that tax receipts are even remotely relevant to what a government is doing in the public sphere?

That doesn't apply to a country with a floating rate currency that it controls.

The correct measurement is the real outcome. There were unemployed throughout the period of Gordon Brown's tenure, and that means that there was insufficient government support to generate full employment. The budget outcome will then be what it will be based upon the spending and saving preferences of the non-government sector.

Functional. Finance.

So by your own measure you are being hypocritical - persisting with economic myths based upon models that have been shown to be completely incorrect by events.

You can't appeal to science when there is nothing scientific about the approach in economics.

Alas if one has any interest in a discussion of reality or "freedom of the press" one had better own a media outlet.

Dow 36k, WMD, Saddam=911, the banks are solvent/no housing bubble, Obama and socialism will lead to SP 500 going to 300..hyperinflation, run on US govt debt, gold to $10000/oz, magic debt limits @90% of gdp and alas "EXPANSIONARY AUSTERITY".

Those were the official positions over the last 15 years of the WSJ and it is a shame that the FT is morphing into the UK version. Thank god for Krugman and his ilk..they confirmed my macro take and enable me to profit from the fools who took idiots like the editorial writers at WSJ and the Chris Giles types seriously. Hanno Achenbach and the rest of the muppets who buy into this must surely have poor investment results to show for it. The muppets never learn.

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